Experts: PPL Plaza lawsuit faces high bar

EMILY PAINE / THE MORNING CALL

Is there a rational basis behind Allentown’s Neighborhood Improvement Zone? The answer to that question could be critical to a lawsuit filed last month by the owners of Allentown’s PPL Plaza office building against state and city officials.

Is there a rational basis behind Allentown’s Neighborhood Improvement Zone? The answer to that question could be critical to a lawsuit filed last month by the owners of Allentown’s PPL Plaza office building against state and city officials. (EMILY PAINE / THE MORNING CALL)

The answer to that question could be critical to a lawsuit filed last month by the owners of Allentown's PPL Plaza office building against state and city officials.

The building's owners sued in U.S. District Court in December, claiming the generous tax benefits conferred on new office development in the zone and the way they have been implemented violated their constitutional rights by making it impossible for them to compete with new NIZ developers' bargain-basement rents.

Nearly every economic development incentive creates winners and losers. Experts in economic development law say the litigation faces fairly long odds because courts typically defer to local and state government officials if they can show a rational basis for their actions.

"The courts don't want to open the floodgates so that every single adverse land use issue becomes an equal protection issue," said Wally Zimolong, a Philadelphia attorney who specializes in construction litigation.

The Plaza owners' lawsuit is unique in its complexity, he said. Typically, such cases are clear-cut, perhaps involving allegations that a zoning board ruled differently on similar development proposals for identically zoned parcels.

"It's new ground as far as I know and I think it's a very interesting case," said Blake Marles, an Allentown attorney with expertise in real estate and development. "Every incentive program is discriminatory in some respect. So the question is whether or not it is justified from a public policy standpoint."

This lawsuit is multi-faceted, alleging that the Neighborhood Improvement Zone legislation itself is discriminatory and that it has been applied unequally in a way that violated the plaintiffs' rights by devaluing their building.

The plaintiffs' strongest argument could be demonstrating that city or state officials went too far in trying to lure the Plaza's only tenant, Talen Energy, to the Allentown waterfront, Zimolong said. The company's lease at the Plaza expires in 2018. It hasn't announced whether it will stay, or where it will go.

"This is going to be precedent-setting decision in many regards because of the unique nature of this case," Zimolong said.

There's no way to know how a particular judge will evaluate a case, said Peter Hammer, an expert on economic development law at Wayne State University Law School, but courts generally defer to local policymakers even in situations when the incentives hurt certain parties.

"The use of geographically targeted economic development tools is well-established law, and something we have decades of experience with in Pennsylvania," said Kevin Greenberg, a Philadelphia attorney with expertise in real estate. "At the end of the day, where incentives are applied is a legislative decision as long as there is a bona fide rational basis for that decision."

In their lawsuit, the plaintiffs make a series of arguments.

First, they allege that PPL Plaza's owners' 14th Amendment rights to equal protection under the U.S. Constitution and a similar section of the state constitution have been violated because the NIZ legislation treats their building differently than every other high-end office building in the zone by excluding them from reaping tenants' state taxes to offer lower rents.

The Allentown Neighborhood Improvement Zone Development Authority has compounded the problem by waiving some restrictions for another developer, The Waterfront, that is seeking to lure PPL Plaza's only tenant, Talen Energy, to the Lehigh riverfront, the suit says.

Proving that will be a challenge, Zimolong said: "Rational basis is a very low standard for the defense to meet."

The rational basis test comes into play when an equal protection claim doesn't involve a protected class such as a racial or religious group. The Plaza's owners aren't alleging the NIZ discriminates against racial or religious minorities, for example.

"There are very few cases, federal cases, that allow an equal protection claim with a class of one, and that is what this would be," Marles said. "They are relatively new and untested."

The Cornell University Law School's Legal Information Institute's Wex legal dictionary puts it this way:

"Under the rational basis test, the courts will uphold a law if it is rationally related to a legitimate government purpose. The challenger of the constitutionality of the statute has the burden of proving that there is no conceivable legitimate purpose or that the law is not rationally related to it."

A legitimate purpose for Allentown's NIZ could be as simple as promoting downtown revitalization, Zimolong said.

Michael Coran, attorney for the Plaza's ownership group, said the lawsuit makes a clear argument that the city and state's creation and administration of the NIZ has no rational basis.

"We're familiar with the applicable legal standards," Coran said. "We stand by what we pleaded in the complaint, including pointing out the reasons the legislation and the way it has been applied by the Allentown Neighborhood Improvement Zone Development Authority is not rational."

The lawsuit also alleges the NIZ and its application have violated the Fifth Amendment of the U.S. Constitution and a similar section of the state constitution, which protect citizens against having their property "taken for public use without just compensation."

It says the city and state have in effect deprived the owners of the Plaza of a portion of the value of their building by making it impossible to compete with the NIZ-subsidized rents offered by competitors with newly constructed office properties.

Talen's lease at PPL Plaza, which runs through April 2018, includes a top-of-market base rate of $27.20 per square foot — not including parking garage rent and building maintenance charges. City Center Investment Corp. has offered tenants rents in the range of $12-$16 per square foot.

In the end, that will lead to foreclosure and the loss of a substantial amount of the owners' investment, the suit argues. It's a difficult claim to win, Marles said, calling it "far-fetched."

Finally, the lawsuit charges the NIZ legislation violates the contract clause of Article 1 of the U.S. Constitution by interfering in the relationship between Talen Energy and its landlord, the owners of the Plaza. Experts called that the weakest of the lawsuit's claims.

Coran said he's confident in the suit's legal arguments.

"We spent a lot of time trying to develop what we thought were the most appropriate legal theories and we are confident with what we allege in the complaint and that our client is entitled to the relief requested in the complaint," he said.